Sellers and REALTORS® have already been identified as casualties of the market turn, but no one has considered the mortgage companies. The foreclosure rate is increasing like wild fire and more and more the term "short sale" is being discussed. Many REALTORS® had never heard of short sales until this year. I guarantee you, most sellers had not heard the term either.
So what is a "short sale"? Put bluntly, it's when the mortgage company "takes it in the shorts". A short sale usually happens when the seller is delinquent or defaulting on their mortgage payments and the property cannot be sold for the amount that it is mortgaged for. Homes purchased last year with zero down payment that are listed for sale this year have lost value in most cases. Because the market changed rapidly and without warning, the properties for sale this year are taking deep discounts and sellers are making huge concessions. To attract a buyer, listed houses have to be the best and the cheapest. The others are not selling.
If the seller purchased last year for $150,000 with no down payment and the house is only worth $120,000 this year, it's impossible for the seller to get a purchaser for $150,000. In order to sell the house for $120,000, the mortgage company has to agree to the loss. Because the purchase price is short on the funds needed to pay off the existing mortgage, it is called a "short sale".
One might proclaim, "What a deal!", but that's not the case. Not only does the mortgage company lose $30,000 plus attorney fees in the above scenario, but the seller will be issued a "1099" for tax purposes by the mortgage company at the end of the year. A 1099? Instead of getting a W-2 for declaring employed wages, the seller is issued a 1099 for "self-employed" income. The seller has to pay taxes on the $30,000 that was lost on the sale. The IRS figures that this money was distributed to someone when the house was purchased and, therefore, someone has to pay taxes on it. Since the money was not received by the mortgage company, it is assumed the seller received the money and spent it (which they did . . . on their house).
A frustrating characteristic of most short sales is that the time is not short. Frequently the lender is slow to approve a loss of this much money. The decision has to go through channels and committees, and everyone knows how cumbersome channels and committees can be. Market trends statistics have to be provided; forms have to be correctly and completely filled out; and the decision maker has to be present instead of on vacation.
The advantage to short sales is that this may be the only options sellers have to bail out of a difficult financial situation. Choosing to pay taxes on the "lost" money is many time better than having a foreclosure on your credit report.
(c) Bonnie Erickson 2006
August 28, 2006
Anonymous, Welcome and sign your name so we know who you are. I fixed your link after checking your site. Give us a heads up as to what company you represent, etc.
Posted by: Bonnie Erickson | March 12, 2007 at 11:15 AM
August 28, 2006
Buying a home is the biggest financial decision most of us will ever make. That's why you need to put as much time and effort into finding a mortgage as finding your dream home. The 7 biggest mistakes you can make when getting a mortgage... http://mortgage.mm01.info/the-7-biggest-mistakes
-you-can-make-when-getting-a-mortgage.html
Posted by: Anonymous | March 12, 2007 at 11:14 AM